Winning at Corporate Governance

CAMBRIDGE: Despite NASDAQ crashes and the threat of US recession, the New Economy is here to stay. Indeed, it remains the key to improved performance in Europe and Japan in the years ahead. But where, exactly, does the heart of the New economy lie? Is it in more competitive labor markets or in better tax systems or in deregulation? Corporate governance, too, is a motor of the New Economy that should not be underrated.

If managers create productive, flexible structures focused on wealth creation, companies find it easy to adjust and explore new sources of productivity and cost control. If decentralization and risk taking are part of a company’s mission, innovation in products and processes is certain to take place. If, on the contrary, bosses behave like cautious executors of a wealthy estate, their companies will soon look like museums.

A country’s economic performance, indeed, is a mirror image of its resident companies. Countries with great companies show great performance. Where then are the great companies of the world to be found?

No surprise that more than half of the most respected companies are American. Although Europe is roughly the same economic size as the US, it has far fewer winning corporate teams. Japan may be much smaller than America or Europe, but it underperforms its share of G7 income or wealth. The picture could not be clearer: the US economy performs stunningly, as does its corporate sector; Europe is far behind; and Japan does not really register.

Peering into the future of this premier league of companies five years from now, the FT sees a number of shifts as likely, with Europe catching up, Japan losing even more ground, and America giving up some ground, too. This glimpse into the future mirrors today’s perceptions of a maturing (a code-word for losing its edge) American economy and a Europe able to play catch-up because the new business culture is at last taking hold. This survey also accurately reflects the reality that very few Japanese firms are succeeding at the hard task of restructuring, of shifting to modern, world-class governance. World-class Sony stays ahead; NTT ( its Docomo subsidiary is the key here) holds on, but old and tired Honda and Matsushita are likely to be relegated to second class status.

The dynamics of the next 5 years will also reflect a head-on competition between winning corporations. Boeing versus Airbus may be the most interesting example. In the current rankings, both are locked in a clinch close to the bottom of the FT list of top firms. In 5 years, however, Airbus will likely be up and Boeing out of the champions league altogether. Why? Airbus has looked ahead, invested, and is bringing on a new Jumbo jet that will make Boeing’s existing products look outdated and inefficient. For Boeing became complacent and forgot that the airline business is a cut-throat world.

When thinking about economic potential, we tend to look at the quality of the labor force, a people’s willingness to work, and the level of education. Seen from this perspective, Europe and Japan should trounce the US because of their far superior basic education systems, and Japanese discipline make Europeans look lazy. In fact, effort and education are not what matters most. Far more significant is the economic environment in which people work – a market economy versus some form of socialism – and the organization of businesses in which they participate.

The best model of corporate governance to produce strong and lasting economic performance remains to be found. In the 1980s, respect for the long-run view of the Japanese model ran high. This is no longer so because of Japan’s economic malaise. Then there was the flirtation with the German model of business-banking integration, which brings capital markets in-house. That lost its attraction when it became clear that cozy relations between bankers and bosses result in tolerance for poor rates of return on capital. Now the US model is in: decentralized, lean on middle management, tough on the CEO; and with a “don’t take no for an answer” code. But this won’t be the last answer, although for the time being it will drive corporate restructuring and the managerial mind.

All this begs the question as to whether it makes sense to change corporate cultures every 10 or 20 years. The pragmatic answer is that it takes very different models to handle a stable and stationary world as opposed to a world in which deregulation and technology produce dramatic change daily. The US model works in times of rapid, pervasive change. This is what lies ahead for the foreseeable future. Hold on tight.

Robert Skidelsky
on why the right economic policies cannot work without the right public expectations.

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